Minimum Wage Policy and Poverty in Indonesia

Investment Rating - The report does not provide a specific investment rating for the industry under review Core Insights - The minimum wage policy in Indonesia has had a distributional impact on wage workers, particularly those at the 15th percentile up to the middle of the wage distribution, without causing overall employment loss [9][10] - Despite the increase in district minimum wages by 67 percent in real terms from 2002 to 2014, the policy has shown no significant effect on per capita household expenditure or changes in poverty status [6][13][14] - The study highlights that the increase in district minimum wages does not correlate with a reduction in poverty, indicating a robust finding across various socioeconomic conditions [14][15] Summary by Sections Introduction - The minimum wage serves as a labor market policy tool aimed at improving the circumstances of low-wage workers, with debates on its effectiveness as an antipoverty program [2][4] - Proponents argue that it raises low-income families' wages, while opponents caution about potential employment losses among vulnerable workers [2] Methodology - The study employs a cross-sectional dataset from Java Island, analyzing the impact of district minimum wages on poverty from 2002 to 2014 [5][6] - An identification strategy is used to address endogeneity concerns by creating unique district-pairs to exploit variations in minimum wages [7][8] Findings - The analysis reveals a positive wage effect for wage workers, with a 2 percent wage increase for a 10 percent rise in district minimum wages, particularly for those in the 15th to 30th percentile [9] - No significant impact on nonwage workers' earnings was found, and the employment effect was generally null, with a slight decline in employment probability among poor households [10][11] - The study concludes that the minimum wage policy does not affect individual poverty status, reinforcing the notion that it lacks a poverty-reduction effect [13][14] Conclusion - The findings contribute to the literature on minimum wage impacts in developing countries, particularly in Indonesia, and suggest that the policy's effectiveness in reducing poverty is limited [15][16]